From what I can tell reading the manual and experimenting, Auto only seems to regulate whether the AC is on or just the fans, which vents the air is directed to, and sort of controls fan speed. You can still control fan speed with Auto on, but that seems to be RELATIVE fan speed in Auto mode, because for example when I get into my car after it's been sitting out in the sun, the fans blast on to try to cool down the interior fast and then slow down after a few minutes even though I didn't change the fan controls.

And as you say, in Auto mode the center knob still works. However, (and there are already several threads about that knob, but I'll indulge you anyway), that knob only controls the temperature of the air that comes out of the two center vents, not the entire car. This is designed so that if you're in a cold climate, you can turn on the heater to warm up your interior but still blow cold air on your face to keep you from getting drowsy due to it being warm and toasty in your car. Some people don't bother with it, others apparently can't live without it. I personally keep it all the way on cold since there are very few parts of the year in Central Texas where I'm using the heater rather than AC.